Statistics released last week confirmed that China became the second-largest producer in the world, overtaking Japan. This marker received much more breathless media attention (see "Fareed Zakaria GPS" ) than another, more significant milestone. In 2009, China surpassed Germany to become the world's largest exporter. In the first half of this year, China increased its export lead over Germany.
As Leo Hindery wrote recently in the Huffington Post
China's overall trade surplus surged in July to $28.7 billion, its highest level in 18 months. Its surplus with just the U.S. was about $26 billion, or an almost unbelievable 90% of the total. China's exports rose 38% year on year, while its pace of growth in imports slowed sharply....Yet China's enormous positive trade balance with the U.S. alone reduces each year our country's GDP by more than $400 billion or nearly three percent.
My studies of the Chinese steel, paper and glass industries indicate that these extraordinary increases in Chinese production and exports have arisen through massive Chinese government subsidies and concomitant expansion of Chinese production capacity. Labor costs, a traditional explanation for China's rise, are small portions of total costs in the capital-intensive industries in which China has export prowess.
Two millennia ago, the military strategist, Sun Tzu wrote that if you know neither your competitor nor yourself, you will succumb in every battle. The U.S.'s ballooning trade deficit with China, and associated job losses, testify to this dictum. As every student of economics knows, free trade leads to efficient resource allocation only when three conditions hold: lack of subsidies to distort true prices, lack of monopolies and lack of negative externalities so companies, rather than societies, bear production costs such as pollution. China's subsidized, government-bolstered and polluting manufacturing industries negate these conditions. Consequently, the markets have failed, and U.S. government intervention needs to close the Pandora's Box.
A cogent letter from 104 U.S. Senators and Representatives highlighted the effects of Chinese trade. Citing a study I conducted on Chinese subsidies , the bi-partisan Congressional letter called on President Obama to conduct an in-depth examination of China's unfair subsidization of its domestic paper industry. Congress asked the President to use the study as the basis for action to remedy these unfair trade practices:
America's paper industry is the most efficient in the world and is part of a supply chain that promotes sustainable forestry practices and good-paying jobs. This industry should not be asked to continue to compete on the unlevel playing field that China has constructed through heavy subsidization of domestic production.
Let us examine the facts on China's paper industry to which Congress alluded. Since 2000, China has tripled its paper production. In 2008, China overtook the U.S. to become the world's largest producer of paper. In 2009, China produced over 17% of the world's paper output and consolidated its place as one of the world's largest paper exporters. However, the research showed that rather than economies of scale or scope or labor costs, China's rapid rise in the global paper industry was fueled by over $33.1 billion in government subsidies from 2002 to 2009.
China has no inherent cost advantages in the capital-intensive paper industry. Labor makes up only 4% of the costs in this industry; in contrast, imported recycled paper and pulp comprise over 35% of the costs. Raw materials, which make up three-fourths of the costs of producing Chinese paper, as well as electricity, coal, and transportation, have doubled in price over the last decade. Yet, Chinese paper sells at a substantial discount compared to U.S. or European paper. The Chinese paper industry has limited economies of scale or scope, with 88% of the companies being small and 12% medium-sized. The industry is geographically fragmented as well, operating in 30 of 31 Chinese provinces.
China's forest base is among the smallest in the world per capita. With no natural advantage for the production of paper, China is the largest importer in the world of pulp and recycled paper. Despite global overcapacity, China's paper industry has added on average 26% of new capacity every year from 2004. With saturated domestic markets, exports have led the development of China's paper industry, with detrimental effects on the U.S. and global economy.
The U.S. trade deficit with China on paper has been increasing exponentially since 2002. Imports from China are rising faster than those from any other country for this industry. In February 2010, the annualized growth rate of Chinese paper and paper-product imports into the U.S. approximated 22%.
Government involvement occurs every step of the way in China. The Chinese government's policies on forestry have systematically aimed to reduce China's dependence on imported raw materials and to subsidize the paper industry's restructuring. Central and local governments' subsidies and soft loans have also protected debt-ridden, state-owned enterprises and small, local companies with excess-production capacity in China.
Only timely U.S. government intervention on trade with China will forestall the demise of U.S. manufacturing. This is not protectionism, but wise competitive policy in a global environment where market failures stave off the benefits from free trade. As U.S. manufacturing jobs in paper and elsewhere evaporate, never to return, so do interlinked competencies in other U.S. manufacturing sectors, including high-technology and green manufacturing. President Obama must realize that inaction too constitutes action, and with respect to trade with China, would be an irreversible, strategic mistake.
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Hey, actually they got a point. LOL
http://www.reuters.com/article/idUSTRE67U4YC20100831
Keep up the good work, prof. I am new to HuffPo but look forward to following you and others that are making a difference.
http://www.google.com/hostednews/ap/article/ALeqM5jmHySATbh1PLQn8u8-GHcu03eoiwD9HULO900
http://www.atimes.com/atimes/Global_Economy/LI02Dj03.html
But right in that article, you read:
"Simply, higher taxes discourage purchases of non-essentials and high-line durable goods, like better appliances, more appointed automobiles and higher-quality homes, and higher taxes and tougher regulation increase incentives to offshore production to China and other locations where those burdens are less and entrepreneurship is more welcome."
WHAT DO YOU CALL HIGH TARIFFS? They are TAXES that Americans pay, for the "privilege" of benefiting special interests. And is he not admitting that it is convoluted regulations in the U.S. (and not some external player like China) that is causing the loss of jobs?
However, I don’t understand – Professor Haley is dangerous and raising prices, while Chinese spies based in Georgia and Indiana and elsewhere in the USA, stealing US technology are not affecting US prices? See the latest instance --
http://www.reuters.com/article/idUSTRE67U5IU20100831
http://www.foxbusiness.com/markets/2010/08/31/dow-researcher-charged-trade-secret-theft-doj/
I suppose you also saw a link to CBS's video on Chinese espionage in America in my message below -- oops, I mean Mediawatcher's message, of course.
Despicable.
And your kind is cowardly and silly enough to try to make it sound like there are lots of you - yet the numbering system, 39, 65, 66, 77, and now 99 would indicate that you are all one and the same.
You silly McCarthyites are truly evil - so what's next, internment camps for the Chinese in America?
For several generations now, it has been every administration's agenda to keep consumer prices LOW. That had meant moving low tech manufacturing offshore. As a result 300 million American consumers benefit day in and day out - retail prices on just about everything are some of the lowest in the world. It had kept American standards of living rising, even though real wages (inflation adjusted) did not do so well over the years. Now Usha and her kind are calling for steps that will clearly jerk up consumer prices - easily 30% to 50% or more. That is going to affect not just a couple of million manufacturing workers, but will adversely affect all 300 million American consumers. WHY should the minority burden the whole society to that degree?
Usha is PLAIN WRONG and DANGEROUS. Her proposals, if adopted, will drag American down another rabbit hole of painful depression.
See the disturbing video from the award-wining CBS 60 Minutes on Chinese espionage in the USA:
http://www.cbsnews.com/video/watch/?id=6816771n&tag=contentMain;cbsCarousel
Your entire argument assumes all nations have equally open markets. This is false, hence your argument is false. The US market is among the most open markets in the world, the largest and the richest; so the US market attracts products of most countries. The Chinese market, Europe's, Latin America's and Asia's are less open. The Chinese market is not nearly so wealthy.
Of all major economies, the US is the least dependent on trade, hence our exports are lower than export oriented economies such as China's, Germany's or Japan's. In other words, your analysis is simplistic and not very good.
People give negative labels to organizations and people they disagree with, and claim that those they agree with are fair and open-minded. These associations justify attacks on the credibility of someone by linking them not with a view, but with a derogatory connotation. Few markets are more protectionist than China's. There are few international prohibitions against government bureaucrats following government orders while running state owned and operated companies. You endorse such anti-competitive activities on the part of China's authoritarian single party state. See, I can do it too.
To many Americans, anything you now say is suspect, and honestly, I suspect both you and Zhu of working in tandem for the Chinese government. Clicks on your names immediately show how often your comments appear together (99 times is my count) and how consistently you both attack anyone writing anything critical of China.
Perhaps the reason Zhuubaajie and I frequently comment on the same posts is because those posts are about topics we understand and care about. Maybe tin-foil hat conspiracy theories aren’t all that credible.
I live in the real world; I make no assumptions about who’s open to trade and who’s not. Have a look at the WTO negotiations sometime, and particularly the agricultural market access issue.
No, my views are informed by experience. Show me a relatively well-off economy that is NOT open to trade and investment. Show me a relatively poor economy that IS open to trade and investment. With the few exceptions of resource-rich economies, the history of post-WWII economics proves that more openness to trade and investment translates directly into more prosperity, higher literacy, better nutrition, and more opportunities for women.
That's the world I live in.
.
The US exported over one trillion dollars worth of goods last year. Our problem is that we imported more than we could afford, because we refuse to live within our means. We don’t need – and cannot afford – cars for everyone, multiple TVs and throw-away cell phones. Trash the credit cards and watch the trade deficit evaporate.
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Although I probably could never convince you, the truth is I’m a native Californian macroeconomist living and working in Asia since 1980. And, not only are these my own views, but I’ve never worked for any government in my life.
Sorry ‘bout that.
Its good you live in the real world. As such, you should recognize that the US trade deficit with China has little to do with agricultural products. You should also realize that there are trade barriers that have nothing to do with tariffs and quotas, but are structural in nature. Barriers such as Japan's distribution system, China's licensing in the telecoms industry, the ties of network based economies or companies linked through interlocking government controlled directorships, cash transfers from national and various local governments and the provision of loans never expected to be paid are all barriers to trade, some of which are not prohibited by WTO rules and some of which are simply difficult to prove. To then turn around a claim free trade exists is disingenuous or worse. Just because you were born in CA means pretty much nothing. I was born in Texas and you know what we think of Californians. What organization do you work for?
Reading Hamilton to make autarky seem attractive is not only nonsense - it is SICK. No nation makes everything by itself. Even China imports food (a lot of it from America), because comparative advantage means that some countries are better at doing something than others.
I see Zhu brought in his backup -- DOR2 -- who has posted 99 comments to the same posts as Zhu and to any post that the Chinese Communist Party sees as affecting its interests, all on China. Please check by clicking o their names.
These anonymous tirades all on the same topics Zhu and DOR2 (I asume DOR1 will arrive soon) feel give them great authority and impartiality.
Please keep your insults to yourself.
Think about that for a minute.
What does it mean that such a huge portion of China’s surplus with the world is actually NOT with “the world,” but only with the USA?
Might it just possibly mean that the US isn’t very good at selling things to China, and the rest of the world (which only accounts for 10% of China’s trade surplus, and includes a whole slew of economies with SURPLUSES on their China trade accounts does it better?
And, if that’s the case (which it is), then perhaps the “problem” with US-China trade is on the US side, where we don’t bother exporting much and wildly over-consume beyond our means.
Think about it.
Sorry, Professor but when one does “research” for protectionists such as the Economic Policy Institute and the Alliance of American Manufacturing, one doesn’t get to be considered neutral on matters of trade.
The comments below are wierd. The professor has struck pay dirt and also scared the Chinese. The subsidies are on the mark and have obviously hit the bulls eye.
As Google, GoDaddy and more & more are discovering ... working with the Communist Party of China might not be the smartest thing to be doing in the long run. The actions that need to be taken now are political.
Where is America's Tank Man? Google "Tank Man" and you will understand.
Professor have you looked at autos? Your help is needed in this industry.
I also enjoyed the exchanges below. Yes, "Zhu bought" -- and by the looks of it, bought cheap. 55 comments in one day and 20 to this blog!! What hopes do Americans have of selling their comments when China has lowered the rate to half a cent for two comments and no going to the bathroom in between submits!?
The quickest way to LOSE that market is to do what is proposed by Haley and such. Protectionism inevitably begets same.
READ IT AGAIN - it says COMPETITIVE ADVANTAGE. Protectionism is not competitive.
And since when are subsidies OK if done by America yet "cheating" if done by someone else? Your kind should really hear yourself sometimes.